Why businesses fail after incubation

Uganda’s entrepreneurial spirit is undeniable. But according to Japheth Kawanguzi, the founder of The Innovation Village, innovation does not occur in isolation, he cautions. It requires a robust ecosystem comprising supportive policies, available capital, market access, and technological readiness. 
“While Uganda has made strides in these areas, its ecosystem remains underdeveloped compared to neighbouring Kenya, which attracts more funding and provides better support for innovators,” Kawanguzi says.
By fostering a better ecosystem, the country can support more successful entrepreneurs.
Many Ugandan start-ups face a myriad of challenges that hinder their growth. 

For instance, Uber Uganda, a ride-hailing service, and Andela Uganda, a software development outsourcing model, significantly scaled down their operations due to lack of traction. 
Digital payments platform PesaPal and food delivery service Hello Food, also failed to gain widespread adoption in a market dominated by other established start-ups.

There is no aggregate data on the number of these innovations and what they have done. Some figures are held by incubation centres, but due to their memoranda of understanding, this data is often not freely shared.

A 2023 research paper published in the African Journal of Business Management by two economists - Keneth Muhwezi and Niclous Kiliman, reports a 4.85-year median survival rate of these firms, “revealing that over 60 percent of [them] do not reach their fifth birthday.”

Very ambitious?
Judith Gihana, the supervisor of the special projects office at the Uganda Industrial Research Institute (UIRI), highlights that a common pitfall for most entrepreneurs is attempting to manage all aspects of their business alone. 

This, she says, often leads to burnout. Financial struggles further exacerbate the challenges, causing many start-ups to falter before they can scale.

Ecosystems
Many enterprise analysts argue that some of regional partners such as Kenya have an ecosystem that is more mature than Uganda’s, providing better support and funding opportunities for innovators. 
As a result, Kenyan innovators attract more funding.
Uganda has enjoyed a far distant second position in East Africa, attracting most fund-intermediated investment from East African-focused funds looking for portfolio diversification outside Kenya and into frontier markets, despite Kenya being the region’s leading investment destination by deal volumes, data from the East Africa Private Equity & Venture Capital Association (EAVCA) shows.

And buoyed by the fastest and most comprehensive legal and regulatory framework reforms for private equity, technology, and investment in the region, Rwanda has long been favoured to overtake Uganda as the second most investable nation in East Africa. 
This is because the country has a reputable onshore international financial centre, competing with Mauritius on an almost equal footing. 

While Uganda’s deal values, at about $78.6 million, were comparable to those of the prior year, at about $70.5 million, year-on-year deal volumes decreased by 53 percent with 15 deals closed as opposed to 32 deals in 2022. 
“The drastic decline in deal volumes in Uganda in 2023 could be explained by the cyclical nature of the investment industry, characterised by periods of bumper harvests, subsequently followed by down markets, particularly as cohorts of private equity funds in the same vintage years reach full investment if paired with a lag in fundraising for new funds.

“This is underscored by 2023 being the most challenging year for first-time fund managers looking to bring new funds to the market needed to invest in new deals,” EAVCA researchers explain.

These challenges have caused start-ups to delay their progress during the incubation phase as they attempt to accumulate cash and market volume. But as they do so, they have clogged pathways for others in search of these opportunities.

Many innovative entrepreneurs tracked by this paper, including those in the NSSF Hi-Innovator programme recognise the crucial role of current accelerators and incubators in growing their operations but don’t fund them, which is their main problem.

Mr Martin Musiime, the founder and chief executive officer of YoWaste, a waste management technology startup, explains that many entrepreneurs set targets and timelines for using specific tranches of money that they receive from investors, but they often find themselves cash-strapped before their innovations reach completion or market readiness.

“Many start-ups fail because they set ambitious targets and launch their innovations, only to run out of cash midway through commercialisation,”  Mr Musiime says. 
Uganda’s enterprises are over trained and underfinanced. You need to design a product, test it, and do first commercialisation that can take you five years, research & development, pivoting and more. 

“By the time an entrepreneur learns something from their business model or the market, they have run out of money. There is no way you can build an ecosystem with limited financing,” says Mr Musiime. 

But he faults some entrepreneurs whose solutions do not solve real problems or commercially viable projects, undermining the core of their business models. 
However, some entrepreneurs face difficulties because their solutions either do not address real problems or are not commercially viable, undermining the foundation of their business models.

The sails
Data from Innovation Village shows that most of Uganda’s innovators are primarily focused on leveraging technology to tackle the country’s most pressing challenges. 
Many are developing innovative solutions in sectors such as FinTech, AgTech, EdTech, and renewable energy, aiming to enhance service delivery and create value in unprecedented ways.

Another anecdotal data from Start-up Blink, a global start-up portal, shows that Uganda has 24 start-ups in the fintech space, 21 in software & data and 16 in retail & ecommerce, which stems its position in start-up space to third in the region and 95th worldwide.

Mr Kawanguzi points out that Uganda’s start-up scene is still plagued with underdeveloped capital markets with deficient notable angel investors like in other developing countries which invest and mentor their firms.

Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their net worth.

“Grants provide support for start-ups in research and developing their initial prototypes. Unfortunately, the subsequent capital gap remains a significant challenge, causing many start-ups to seek additional grants rather than focusing on scaling their enterprises,” he adds.

Venture capital also poses challenges due to the market size. 
He used the failure of an entrepreneur who had raised more than $50 million as an example, saying venture capital is not for merely great companies, but for excep-tionally excellent ones capable of generating substantial returns in the right market at the right The Ugandan start-up ecosystem only raised $5m out of the over $3.191b raised by all African startups in 2023, going by the African Tech Start-ups Funding report 2023. 

Mr Kawanguzi says many Ugandan entrepreneurs are struggling with the pioneer gap - the phase between the initial concept and reaching scale. This is the period when many start-ups find it challenging to secure funding and support because investors often perceive them as too new and risky. 

“Despite being a phase of extensive experimentation and potential failure, it also presents significant opportunities for social impact. We need patient capital to support our most promising entrepreneurs through these stages,” Mr Kawanguzi says.

Successful startups
Uganda has, however, had several successful indigenous innovations from Rocket Health, Xente, Ensibuuko, MobiPay, and Wazi. 
“They succeeded because they are solving market problems in new ways and creating value for customers,” says Mr Kawanguzi.

“[But] the government should build a better innovation ecosystem. Policies should be leveraged to incentivise participation from various players in the ecosystem. Proactive regulation signals to existing and potential entrepreneurs and their investors that the government values and will support entrepreneurship. For example, taxation can reward value creation over value extraction and direct value creation towards a more inclusive and sustainable ecosystem,” he explains.

In 2018, Tunisia became the first African country to pass start-up-related legislation, making it easier for local entrepreneurs to start and run businesses. Senegal followed in 2019, launching a resource centre dedicated to start-ups. 
In these cases, regulations serve as a tool for economic recovery and incentivises established digital businesses.
In Uganda, the process of developing a Start-up Act has just begun. 
“Such legislation can galvanise the entrepreneurship community and familiarise the government with entrepreneurial issues. This leads to increased innovation and firm growth, faster incorporation and registration of businesses, the attraction of expertise and gig workers, and improved access to capital,” Mr Kawanguzi says.

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